Ion Geophysical Corporation (IO) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the ION Geophysical second-quarter earnings call. During today's presentation, all parties will be a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, Thursday, August 5, 2010. I would now like to turn the conference over to Jack Lascar of DRG&E. Please go ahead.

Thank you, Luke, and good morning and welcome to the ION Geophysical Corporation second-quarter earnings conference call. We appreciate your joining us today. Your hosts are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management I have a few items to cover. If you would like to be on an email distribution list to receive future news releases or experience a technical problem and didn't receive yours yesterday, please call us at 713-529-6600 and let us know.

If you would like to listen to a replay of today's call, it is available via webcast by going to the investor relations section of the Company's website at www.IONGeo.com or via a recorded instant replay until August 19. Information was provided in yesterday's earnings release.

I should also point out that we will be using some PowerPoint slides to accompany today's call that are accessible via a link on the homepage of ION's website at www.IONGeo.com. Information reported on this call speaks only as of today, August 5, 2010, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward looking statements are based on management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which the Company is unable to predict or control that may cause the Company's actual results or performance to differ materially from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors discussed by the Company from time to time in its filings with the SEC, including in its annual report on Form 10-K from the year ended December 31, 2009 and it's quarterly report from Form 10-Q.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by these statements. I will now turn the call over to Bob Peebler.

Thanks, Jack, and good morning. Let me start by addressing what is on many of our investors' minds and that is the impact of the Gulf of Mexico oil spill on ION's business. In the near term, the only direct impact was a short-term hit to our multi-client business which we estimate was $9 million for the quarter.

The $9 million includes $4 million of actual Gulf of Mexico data sales and the balance was with BP related to other parts of the world. We've been assured that this was a timing issue related to management distraction which slowed down their approval process. We will likely see these expected second-quarter sales be completed later in the year.

Our Gulf of Mexico data library is very mature; it does not represent a significant portion of our future business as a majority of our new venture projects are in places like the Arctic, Brazil, and the West Coast of Africa. The only other area of some concern would be our Arctic projects, but we have not had any indication of reduced interest by oil companies since our efforts involve very early stage exploration and our libraries are used for fundamental base and understanding, normally years ahead of any drilling operations.

Also, we don't believe our marine equipment business will be impacted since our customers' vessels move from place to place around the world. The only other exposure would be to our data processing business and we still have solid backlog that should underpin another record year for this group.

It's too early to tell what the long-term impact might be on our DP business, but we are starting to mitigate any potential long-term risk through expanding our business into other international markets such as Mexico. In summary, we believe at this time that the impact to our business is minimal this year and somewhat uncertain over the long-term.

Now more specifically to our business this quarter, first of all I am pleased that we just reported a profitable quarter even though it was only $0.01 per share. In addition, we have sufficient strength in our data processing, marine equipment, and concept systems software business to help offset what we are confident was an anomaly in our multi-client business.

As previously mentioned, we lost approximately $9 million in sales in the quarter due to the short-term impact of the BP spill. In addition, we had no new venture projects running during the quarter as we are currently focused on the Arctic where the shooting season starts in July and runs through early fall. We expect a much stronger second half for our multi-client business starting in the third quarter based on these current underwritten projects in the Arctic.

Our proprietary data processing business remains strong with sufficient backlog for this year, giving us confidence that we can look forward to another record performance. We are also having a solid year for our marine equipment business with sufficient new technology sales of positioning products to partially offset the decline in equipment sales related to new vessels.

One very bright spot for our marine group was the announcement last night of the recent contract awarded by BGP to provide DigiSTREAMER for their new 12 streamer vessels that will be commissioned in 2011. This is a breakthrough for ION as this will be the first material DigiSTREAMER sale, which is a new market for ION and also reflects a commitment by BGP in supporting ION as a significant shareholder and joint venture partner.

As Brian will explain later, we will be reporting our 49% share in our joint venture, INOVA Geophysical, on a quarterly lag. So even though we will not reflect the second-quarter results of INOVA in ION's results until the third quarter, I can report that our land equipment business did experience some growth quarter over quarter.

Additionally, we are seeing some recovery in North America as the shale plays continue to expand and bidding activity is picking up for our contractor customers worldwide including BGP. However, the land seismic business is far from a full recovery as contractors still have excess capacity due to the market collapse of 2009. The current opinion is that we will see slow improvement during 2010 going into 2011. We do not expect INOVA to become profitable before 2011.

The good news is the fact that the new management team of INOVA, comprised of both ION and BGP personnel, is now formed and they have made significant progress in getting the new company functioning with a focus on R&D to support future BGP sales and with plans for reducing manufacturing costs. I am very optimistic about the future potential of INOVA and believe we are on track to achieving our goal of a fully functional joint venture by year-end. With that, I will turn the call over to Brian.

Thank you, Bob. Good morning, everyone. With the formation of INOVA Geophysical, we reorganized our business into three primary segments -- software, solutions, and systems. Our software segment represents our former data management solutions segment. The solutions segment continues to represent what we called ION Solutions, which is comprised of data processing, new ventures, and data library.

To clarify our definitions, our multi-client business is comprised of new venture activity and data libraries. We define new venture activity as the process of acquiring and processing data in our SPAN products. Once the data is processed, the SPAN moves into our data library category.

The last segment, our systems segment, represents both our marine and remaining land equipment businesses that were not contributed to the INOVA joint venture. The historical results of our Legacy Land business that were contributed to the joint venture have been broken out as Legacy Land Systems (INOVA).

In addition, starting this quarter we have strived to provide improved transparency into ION for investors by increasing the amount of information we are providing in our earnings release, incorporating into our earnings call and disclosing in our quarterly filings. Our intention is that this new information will give our investors better visibility into our segments to understand the composition and trending of our revenues.

On the left side of this next slide, we show the trailing 12-month revenues by segment compared to the same period of the prior year. To the right of the slide, we adjust this to remove the impact of our Legacy Land business getting a clearer view of how our current business segments are performing.

The systems business is down primarily due to a lower volume of DSO sales in the current trailing 12 months compared to the same period of prior year. Systems revenues were also impacted by the timing of sales to new vessels entering the market in late 2008 and early 2009.

Our solutions segment is trending down from the comparable period primarily due to the timing of 2010 projects as they are heavily skewed to the back half of the year. Our software segment is shown continued steady growth as conversion of vessels to the Orca software platform progresses.

Now that we have a high-level view of our segment results, let's take a closer look at the details within each segment. First, let's start with the software segment. This segment has continued to show robust sales and solid growth. The left side of the slide shows sales on a pound sterling basis as this is the currency in which the segment conducts its business.

The steady growth of this business is driven by the conversion of vessels to Orca, our command and control software platform. To date we have converted 42 of the estimated 122 vessels in the seismic fleet, which are represents approximately 34% of total vessels; 10 of these 42 vessels were converted during the last quarter.

Initially, acceptance of Orca was seen primarily in the high-end 3-D vessel market where the application was being used for complex 3-D and wide azimuth surveys employing multiple source vessels. This last quarter has demonstrated that we are now achieving success in penetrating down into the midrange 3-D vessel segment with vessels towing from five to nine streamers. We're even enjoying some limited success in converting low-end 3-D and 2-D vessels.

For our solutions segment, while our second-quarter data library sales were flat with prior year, we are showing improvement in a year-to-date basis, which is generally a good indication of the overall healing of the market. Our data processing division continues to show strong growth and continues to enjoy a solid backlog of business, which should carry it well into 2011.

The largest decrease year-over-year is in our new ventures division. In 2009, our new venture projects were spread more evenly throughout the year. However in 2010, the majority of our projects are slated to begin in the second half of the year.

As you can see, although we have only spent $21 million in CapEx related to multi-client work for the first half of 2010, we are projecting an annual spend of approximately $90 million to $100 million on a full-year basis. As Bob described, we are currently focused on several projects in the Arctic and we expect to see our investment in these projects contribute to stronger results in the back half of the year.

A new metric we are starting to report is backlog for the solutions segment. Backlog is defined as data processing work that has been contracted and new venture activity that has been underwritten. Backlog as of the end of the second quarter was approximately $118 million compared to $86 million as of the second quarter of 2009. Our current backlog is unusually high due to the pending new venture work for the third quarter and typically runs approximately $70 million to $90 million.

Now let's look at our systems segment with a comparison of revenues for year-to-date 2010 versus year-to-date 2009. I want to reiterate that starting in the second quarter of 2010 our 49% share of INOVA Geophysical results is being reported on the income statement below operating income under equity income or loss. We are reporting our share of INOVA Geophysical's results on a quarterly lag and we have not included the Legacy Land business operations in this slide or discussion.

Not too surprisingly, on a year-to-date basis as compared to the same period of the prior year, our towed streamer related product sales were down, primarily due to the timing of sales to new vessels entering the market in early 2009. Likewise, our geophone sales were down compared to the prior year, which is mainly due to the slow recovery of the land seismic market.

Our OBC business has been stalled out through the last 24 months as RXT has not purchased further VSO systems. The exclusivity arrangement with RXT has ended and we are actively marketing that product line to other potential users of the technology. In addition, we have continued to improve upon the VSO system with the recent release of VSO II. We are confident that the OBC market will continue to grow and VSO as a significant technology in this market will again become a solid revenue stream for ION.

Finally, I wanted to give you an update on the new joint venture. The second quarter of 2010 includes the first quarter of INOVA Geophysical's operations, which represent the last five days of March. The first-quarter results are reflected on the income statement below operating income as a loss of $200,000.

Although final audited numbers are not yet available for INOVA, we are estimating second-quarter revenues to be in the range of $17 million to $19 million, generating an operating loss of approximately $14 million to $16 million and a net loss of approximately $11 million to $13 million. Please remember these are rough estimates and not final audited numbers.

Depending on the timing of an INOVA's accounting close we may not always have these estimates available for our quarterly earnings call; however, we recognize the inconvenience to our investors of reporting INOVA on a quarterly lag and we will strive to give you these estimates as they become available.

As Bob already discussed, we anticipate that INOVA Geophysical will have a slow 2010 which will likely continue into 2011 as the market slowly improves. With that, we'll open up the call for questions.

(Operator Instructions). James West, Barclays Capital.

Good morning, Bob. Good morning, Brian. Bob, one market that was particularly strong last cycle and then particularly weak I think during the downturn was, Russia. And I was curious if you could give us an update on what you're seeing in that market today. Is it -- I know the drilling activity has recovered, but what about seismic?

Yes, first a couple comments about Russia. I think one trend in Russia, which I think is a positive compared to a couple years ago, is there is a continuing consolidation going on. There are two major players and then even some of the smaller guys are consolidating. So I think that's a favorable trend in that one of the difficulties in Russia has always been financing and just having the balance sheet. So we're happy to see some consolidation going over, which I think is a good medium -- short, medium, and long-term trend.

We are getting reports from people that the geophysical contracting business is certainly stronger this year than last year. So we're seeing -- we're starting to see that activity pick up. My expectation is it will be probably moderately better than last year, which doesn't say a whole lot compared to last, just from the fact that you've got to soak up the capacity -- the contracts have to get back to work, soak up the capacity.

But I think the general trend is good. It's my view that Russia will -- And when I say Russia, the whole former Soviet Union, that whole part of the world should slowly but surely increase. I would guess it will be the 2011 cycle where we can see some real strength coming back.

Okay, that's helpful. With respect to INOVA, obviously the relationship with BGP is very strong and we saw the sale on the marine side this quarter. What about penetration into other Chinese contractors? Presumably the management team at INOVA has been marketing equipment to others besides just the BGP relationship. Has there been any penetration yet or how do you feel about that penetration going forward?

The guys have spent a very large amount of their initial time in China. One is that we do see that as a big market, not only for BGP, but also the other CMPC oil fields still have some of their own contracting crews. So China hasn't totally -- even CMPC hasn't totally consolidated all of their activities under BGP.

So one of the challenges and one of the activities that our team has been doing is actually going from oilfield to oilfield sort of reacquainting -- talking about INOVA. Obviously there's a lot of strong interest from CMPC down into those oil fields for them to buy from INOVA. So I think that right now we're in a market for preparation phase. The biggest challenge -- and then you've got other companies such as Sinopec and then there are some smaller companies.

Now, just from a budget cycle point of view, we're sort of already -- this year is already sort of locked and loaded and frankly there isn't a whole lot of capital spend this year going on because they had stacked crews. So I think it's again, our guys are sort of preparing for the next cycle which will -- so the budget cycle really will start in late this year and early next year and going to 2011.

That's again one of the reasons that we've really said that we don't expect the land equipment business to get a lot stronger this year, just a slow improvement and in 2011 we should start seeing things pick up -- returning to more of a normal pace.

Okay, and then just one final question for Brian. I guess first thanks for the additional color on the segments. I think it's very helpful. You mentioned solutions backlog of I think $118 million. I'm curious, I know we've got the Arctic new ventures starting now or underway now. How will that $118 million flow out over the next two, three quarters? Should we expect it all to be done by year-end or does it take longer?

No, the nature of that backlog, James, is that as we work through the backlog we tend to replace it as well. It's not just all new ventures stuff. It's also data processing business that's under contract. So on a normalized basis that backlog typically always runs in the $70 million to $90 million range. So I would expect that over the next two quarters we'll probably be back down to that normalized range.

Okay. Thanks, guys.

Daniel Burke.

Brian, a question for you. I appreciate the ability to give us in your commentary the expected sort of Q2 INOVA outcome. And just as a point of clarity then, putting back to your guidance, you'd expect at the midpoint of that net loss of $11 million to $13 million we would expect to see an equity loss of about $6 million from you guys in Q3. Is that -- am I drawing the right conclusion?

Yes, that's correct.

Okay, and so if you look at that coming through, not a surprise to see INOVA in that position. But the guidance towards profitability for the whole year, clearly that's a larger equity loss to overcome than the one you had in the second quarter when you really don't have INOVA represented. So maybe you guys could tick through where you cover, what potential -- which segments you're really going to see a sequential step up here from Q2 to Q3 in terms of results.

Sure, I can -- do you want to cover that, Bob?

No, go ahead.

If you take a look at the business and sort of breakdown the various aspects of the business, the data processing business continues to be strong. We'd expect that to continue. The software business is strong and we'd expect continued performance there. Probably the single largest uptick will be on the solution side of the house because we have a significant amount of activity around the new venture programs in the third quarter.

Okay, that's useful. It helps me understand how to think about Q3. The sale to BGP, certainly good news. Two questions. One, can you help me understand why the revenue would be booked next year? Are there any nuances to the terms of that contract we should be aware of? And then are there any additional marine vessels in the new build BGP order book we should be on the lookout for?

Yes, I'll cover that. The reason -- one is that we'll be shipping right up to the end of the quarter and then we have to go through an acceptance of configuration. And so it's just prudent for us, until we have that acceptance we're not going to recognize revenue. We'll be staging -- it's a big system and we'll mainly just be shipping equipment. So we have to stage it, put it together, do integration testing on the vessel, and that really will happen probably sometime in the first quarter of 2011.

Okay, and then are there any other marine seismic vessels on the BGP side that they're still looking for streamer outfitting?

I would say this is probably -- I can't speak for BGP, but just sort of knowing their current work, I think this is their main focus for 2011 will be to get that -- that's a very large vessel. They do have some smaller vessels and I just don't -- I'm not familiar with what they may need on -- if they do they'd be more or less expansion kind of things.

I understand, Bob. And Brian, one last one maybe going back to just the income statement here. A lot of cost obviously absorbed into INOVA. Are the run rates we saw this quarter for R&D and marketing and sales pretty representative of what we should expect second half of the year when obviously the recognition of marketing and sales at least could skip up a little bit on revenue?

Well, obviously I want to be cautious not to be coming up with guidance or any direction that could be indicated as guidance. But I think that our -- I don't see any material change in our current run rates.

Okay, that's helpful. Thank you, guys, for the answers.

(Operator Instructions). Terese Fabian, Sidoti.

Thank you and good morning. I have a question. Well, first of all, let me say that I find your new business breakdown very helpful in understanding ION's business, so thank you for that. But can you talk about the towed streamer system, under the systems segment? What does that represent? Is that all of your marine streamer and associated sales?

Yes, Terese, that's going to represent primarily our products that we sell into the towed streamer segment. So positioning products, the streamers themselves, so pretty much product sales that apply to towed streamer applications.

Okay and that had a nice sequential uptick, about level with last year's number I guess. Who are you selling to? And you said I think that this is going to be your first large DigiSTREAMER sale. Is that correct? To BGP?

Yes, that is our first multi-streamer sale. So we've sold a single streamer to customers in the past, but this is the first time we're doing a 12 streamer application to BGP. But the typical cast of characters we sell to on the marine side is the same. It's still the PGS' and the [food rows] and pretty much -- as you know, that area of our business is fairly consolidated. And it's a handful of operators out there shooting marine seismic and they're all purchasing from us.

Okay, and I understand the confidentiality of sales numbers, but do you have any guidance on what the revenue of this BGP sale would be and what the operating margins would be on that?

Yes, I unfortunately just can't speak to the specifics of that transaction.

Okay, maybe I'll just ask another question then. On the land business, can you talk about what's happening with FireFly both in INOVA and on some of the projects you're working?

I'll take that. On FireFly, one of the -- as we've talked the past, one of the changes we made last year was to take the FireFly equipment we had and put it into a rental model. It was really our belief that we needed to get more market exposure and that has worked quite well. We have a system now in Mexico that's gone from basically job to job. We've got one going for Apache down in Latin America. We've got -- in the Marcellus Shale, we've had good success there and in fact we'll have a fairly large project, a large project starting this fall again in the Marcellus.

Now, we're very confident that over time, as you can imagine, our rental rates are fairly significant. So over time, once the contractors get familiar with the system, see a book of business, we should see some FireFly sales through that. But in the meantime it's a good revenue stream for us system.

Just to speak to the system itself, we are now routinely running very high density jobs 10,000 channels and greater. We're getting great what's called trace recovery, which is a good indication of the quality of the system. We get trace recoveries of 98 -- 90% and greater percent, which means if you put all 10,000 or more stations out, we're actually recovering traces from all those 10,000 stations, 98 plus percent time, which is an excellent technical accomplishment.

So we're still bullish on cableless systems. We're confident we have a leadership position with these very large scale systems and experience and it's just a matter of time to keep working away. We're now focused on getting the cost of the systems down and working on things, user interfaces, reliability and ease of use and all the normal things you do in a cycle.

Okay, thank you very much. I'll queue back up for another question.

(Operator Instructions). Terese Fabian.

Thank you, a question on the aftermath of the Gulf of Mexico oil spill. Are there any industry review groups looking at the way marine seismic is conducted? Are you participating in any of this? Do you expect changes coming this way?

There are groups. The biggest one is -- there's a group that's a formalized group of all the seismic contractors. And that one is very much involved. Currently the only limits that have been placed on the industry are related to where there might be actually oil spill which is becoming less and less of an issue. So there were instructions that you had to basically negotiate around those spills.

Now there's always a constant -- there's always been a constant pressure on the contractors related to mammals and obviously this bill has brought all that to the front once again. But so far there hasn't been any real major restrictions beyond just avoiding the spill. It's one of -- the industry has to stay engaged because there are people that would love to stop everything everywhere. And so obviously we have to be involved through lobbying and different things through the industry.

Are you seeing any impact on other areas worldwide from the spill in terms of your work?

No, not in our work. We're very aware of those possibilities, but we really have not seen -- there was a lot of discussion, but we haven't really seen any real impact. Now what we do see is the possibility of things moving around. You may have seismic crews moving out of the Gulf and going to other parts of the world, so that is yet to be seen how that's going to play out.

Okay, and do you have a percentage of your sales now that are international for the first half of the year?

Terese, I don't have that with me, but we typically [enclose] -- 50%.

Okay. Thank you.

Thank you. Management, there are no further questions in the queue. Please proceed with any closing statements.

Okay, well thanks for taking the time. Thank you for attending the conference. We look forward to talking to you during our third-quarter call.

Ladies and gentlemen, this concludes the ION Geophysical second-quarter earnings call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 with the access code 433-1111. ATT would like to thank you for your participation. You may now disconnect.